While geo-political risks have risen, investors are taking their cue from policy makers from Washington to Frankfurt to Beijing who are driving down interest rates and flooding the world with cash to prop up their economies. The balance sheets of the world’s six biggest central banks have more than doubled since 2006 to $13.2 trillion, according to Chicago-based Bianco Research LLC.

“Investors are numb and sedated,” Jeffrey Sherman, a commodities money manager who helps oversee $25 billion for DoubleLine Capital LP in Los Angeles, said in a Feb. 7 telephone interview. “Money sloshing around the system leads to lower volatility.”

Market Returns

Investors have responded by driving equities to their best start in 18 years, pushing government bond yields to record lows and sending commodities prices soaring....

The balance sheets of central banks in the U.S., Switzerland, U.K., European Union, Japan and China have swelled from a collective $4.99 trillion in May 2006 and $10.1 trillion in December 2008, two months after the collapse of Lehman Brothers Holdings Inc. spurred the worst financial crisis since the Great Depression, according to Bianco Research.

China’s central bank holds about $4.5 trillion of securities, the most of any such institution in the world, Bianco Research’s data show. The ECB has about 2.7 trillion euros ($3.6 trillion) while the Fed holds $2.9 trillion, up from $898 billion in 2008.

Fed Stimulus

Fed Chairman Ben S. Bernanke said Jan. 25 that he’s considering another set of asset purchases, or quantitative easing. Economists in a Bloomberg News survey the same day estimated the central bank will buy mortgage bonds should the economy warrant more stimulus, with purchases of all types totaling $500 billion....

The ECB loans have “taken a tail risk off the table,” Andrew Milligan, who helps oversee about $262 billion as the Edinburgh-based head of global strategy at Standard Life Investments Ltd., said in a Feb. 7 telephone interview, referring to a major disruptive event. “People were very concerned in the fourth quarter about a nasty bank deleveraging having a noticeable impact on the economy. That looks to be tempered for the time being.”

Excerpt: The 10 yr auction was mixed but not enough a mover either way to alter market dynamics. The yield of 2.02% was a touch below the when issued but the bid to cover of 3.05 was just under the average over the last 12 months of 3.14. Direct and indirect bidders took a combined amount similar to the Jan auction. If there is a conclusion to draw, its that concerns about global growth are still obvious as why else would there be such demand for 10 yr Treasuries yielding 2%, especially with the implied inflation rate now in the TIPS market at 2.20%, the highest since August. The US economic data has improved but the bond market, in clear contrast to the equity market, seems more focused on Europe, the growth moderation in Asia and uncertain sustainability of US growth in light of another mediocre GDP report for Q4. Also, company comments on Q4 earnings calls didn’t point to robustness in economic activity. That said, stocks are more on the drug high of QE pump priming.

Bullard said in a speech that concerns over the nation's large output gap is forcing the philosophy that 'keeping inflation at bay' is a priority. This, in turn, forces the idea that nominal interest rates should remain near zero, Bullard suggested.

"If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates," Bullard said Monday when speaking to the Union League Club of Chicago in Illinois. "This could be a looming disaster for the United States. I want to now turn to argue that the large output gap view may be conceptually inappropriate in the current situation. We may do better to replace it with the notion of a permanent, one-time shock to wealth."

Bullard said a near-zero interest rate policy for the next few years could distort decision making in the economy, hurting overall economic growth, while creating a low inflation target that makes it difficult to edge up rates in the future.

He says this is especially true with low rates hurting savers, who are generally older Americans with fixed-income and assets. Meanwhile, young Americans are struggling with job prospects, making it less likely they will be able to stimulate economic activity by taking advantage of low interest rates.

"Consequently, the consumption of the older generations may be damaged by the low real interest rates without any countervailing increase in consumption by other households in the economy. In this sense, the policy could be counterproductive," Bullard said.

In his speech, Bullard said taking a different view of the housing crash and economy would put the realities of today's economy into perspective. Rather than expecting the recovery to end with exponential growth, he says, the 2008 crisis should be viewed as a one-time shock to wealth as home values plummeted 30% after the year 2006.

"Since housing prices are not expected to rebound to the previous peak anytime soon, that wealth is simply gone for now," Bullard said. "This has lowered consumption and output, and lower levels of production have caused a significant disruption in U.S. labor markets."

Excerpt: Student debt is looming as a national problem that could have repercussions reminiscent of the mortgage crisis, says a new report by the National Association of Consumer Bankruptcy Attorneys.

The study, released Tuesday and based on a nationwide survey of 860 bankruptcy lawyers, said that bankruptcy attorneys nationwide are seeing at the ground level "what feels too much like what they saw before the foreclosure crisis crashed onto the national scene."

The report calls for a change in bankruptcy laws.

In the survey, 81 percent of respondents said that potential clients with student loan debt have increased "significantly" or "somewhat" in the last four years.

And 95 percent of respondents reported that few student loan debtors have any chance of discharging what they owe through a bankruptcy proceeding because they have to prove "undue hardship" — a standard that is difficult to meet.

The total debt from student loans is about $1 trillion, about 14 times more than 15 years ago and well above the estimated total credit card debt of $798 billion.

Locally, students attending 13 area colleges took out about 36,000 federal loans totaling $233 million last school year.

The report urges a change in bankruptcy laws so that those burdened with student debt would be on the same footing as others in debt facing bankruptcy.

"It's not fair and needs to be corrected," said U.S. Rep. Steve Cohen, D-Tenn., sponsor of legislation that would make changes sought in the report.

Cohen outlined the revisions in a conference call with reporters Tuesday, along with officials from the bankruptcy lawyers association. Douglas J. Lustig, a trustee for federal bankruptcy court in western New York, agreed that something should be done.

"The problem is that you have former students who filed for bankruptcy and are not able to get a fresh start," said Lustig, who also represents clients in bankruptcy court.

Lustig did not take part in Tuesday's conference call.

Those with student debt should be able to discharge all or part of the money owed in a bankruptcy proceeding and the law should be changed so that the debt can be paid over a longer period of time, Lustig said.

The high cost of college tuition and room-and-board and high interest rates charged by some private lenders are adding to the problem, experts say.

"The rising cost of education definitely needs to be in the forefront of people's minds," said Cassandra Robinson, 23, who graduated from the University of Rochester in 2010 and now owes about $100,000 in student debt.

William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, offered a warning.

"Take it from those of us on the frontline of economic distress in America," he said. "This could very well be the next debt bomb for the U.S. economy."

Excerpt: Barely two weeks into a new government program that allows severely underwater borrowers with loans backed by Fannie Mae and Freddie Mac to refinance their loans to lower rates, the numbers are surging.

Applications to refinance jumped 9.4 percent last week, seasonally adjusted, according to the Mortgage Bankers Association. Record low interest rates on the thirty-year fixed, averaging 4.05 percent, are only adding fuel to the fire.

“There was a lot of pent up demand,” said Bank of America spokesman Terry Francisco of the recently revamped Home Affordable Refinance Program (HARP 2). The newest incarnation removes the cap on negative equity, so borrowers who owe more than 125 percent of their home’s current value can now qualify. These so-called severely underwater borrowers, however, must be current on their payments. ...

The refinance share of mortgage activity is now 80.5 percent of total applications.

Applications for mortgages to purchase a home were flat last week and have been basically flat now for a month, which is not a promising sign for home sales. President Obama last week announced yet another government refinance program to help underwater borrowers who do not have Fannie or Freddie-backed loans. The plan could cost $5-10 billion and requires Congressional approval; some have called it dead on arrival.

Strong refinance activity means more money in consumers’ pockets and potentially more debt reduction, as some borrowers opt for fixed-rate amortizing loans as opposed to interest-only adjustable rate mortgages. Unfortunately, the flip side, which is lower applications to purchase a home, does not bode well for housing’s fledgling recover. “The latest weakness of mortgage applications for home purchase may suggest that the recent improvement in home sales is not built on solid foundations,” says Paul Diggle of Capital Economics.

Excerpt: More than four-fifths of bankruptcy attorneys have seen a notable jump in the number of potential clients with student loan debt, the National Assn. of Consumer Bankruptcy Attorneys says.

Student loan debt is pushing an increasing number of young people and their parents toward bankruptcy, according to a survey released Tuesday.

More than four-fifths of bankruptcy attorneys say they've seen a notable jump in the number of potential clients with student loan debt, with nearly half the lawyers reporting a significant increase in such cases, according to the report by the National Assn. of Consumer Bankruptcy Attorneys.

Nearly one-quarter of attorneys say the number of potential student loan clients has risen 50% to 100%, while 39% of attorneys report increases of 25% to 50%.

Student debt is rising for obvious reasons: steadily spiraling college costs, financial aid cutbacks at public universities and a stubbornly weak economy that's making it difficult for graduates to find jobs.

The average student loan debt of 2010 college graduates topped $25,000 — the first time it has exceeded that inglorious mark. Graduating seniors had an average loan burden of $25,250, up 5.2% from the $24,000 owed by the class of 2009, according to the Project on Student Debt in Oakland.

Student loan debt can be overwhelming for people who can't pay it off. Unlike many other forms of personal debt, student loans cannot be discharged in bankruptcy, meaning the debt can hang over students well into their adult lives.

The bankruptcy attorneys group says worsening debt levels could spur a financial crisis similar to the mortgage meltdown.

"Take it from those of us on the frontline of economic distress in America," said William E. Brewer Jr., the group's president. "This could very well be the next debt bomb for the U.S. economy."

Excerpt: An overnight marathon meeting of the three coalition party leaders with Prime Minister Lucas Papademos resulted in the most violent devaluation of labour pay during peacetime, pending a further cut in pensions to be agreed within 15 days. 9--It's Time To End the Greek Rescue Farce, Der Speigel

“On this new programme will depend not only the financial survival of the country for the coming years but also whether the country will remain in the eurozone or endanger its European prospects,” said Finance Minister Evangelos Venizelos as he emerged from the 13-hour talks at Maximos House at 6am on February 9.

Venizelos later flew to Brussels for a special Eurogroup session that was supposed to approve a new, 130bn euro EU-IMF bailout loan pact including a private sector involvement (PSI) in the writedown of 50 percent off the face value of privately held Greek debt.

An overnight marathon meeting of the three coalition party leaders with Prime Minister Lucas Papademos resulted in the most violent devaluation of labour pay during peacetime, pending a further cut in pensions to be agreed within 15 days.

“On this new programme will depend not only the financial survival of the country for the coming years but also whether the country will remain in the eurozone or endanger its European prospects,” said Finance Minister Evangelos Venizelos as he emerged from the 13-hour talks at Maximos House at 6am on February 9.

Venizelos later flew to Brussels for a special Eurogroup session that was supposed to approve a new, 130bn euro EU-IMF bailout loan pact including a private sector involvement (PSI) in the writedown of 50 percent off the face value of privately held Greek debt....

Wage cuts

The shock-and-awe measures agreed so far are all supposed to bring about a 15 percent reduction in unit labour costs in the country by cutting real wages and bonuses in the private sector by 22-40 percent on average while dismantling sectoral collective bargaining agreements.

• A direct cut to the minimum basic wage by 22 percent at all levels of pay contracts

• A further reduction of 10 percent on the basic wage of first-time employees between the ages of 18-25, bringing the total reduction on this category to 32 percent

• Reduced basic wages to remain frozen throughout the 2012-2015 period

• A timetable of negotiations with social partners until July for the drastic revision of the National General Collective Labour Contract (EGSSE) “to harmonise it with that of countries at similar competitive position”

• A reduction of 2 percent on social insurance contributions to the IKA private sector fund

Labour contracts

• A maximum of three years duration for all collective wage agreements

• Existing labour agreements lasting for another two years will be terminated no later than one year after the legislation of the present measures

• The transposition period for the carry-over of existing pay pacts is reduced from six to three months

• If a new collective contract is not signed within three months from the expiry of the previous one, the contract reverts to the current basic rates of the EGSEE

• The total number of civil servants to be reduced by 150,000 until 2015. At least 15,000 must leave the public sector by the end of 2012.

• 550 positions of deputy mayors should be scrapped, including their auxiliary staff

• All special public sector payrolls must be revised downwards to save at least 0.3 percent of GDP (affecting payrolls of judges, doctors, diplomats, professors, military and police officers)

• Public investment programme to be cut by 400m euros this year

Excerpt: For the past two years, Greece has wrangled with the euro-zone states and the International Monetary Fund (IMF) over its so-called "rescue." Austerity measures have been agreed to, aid has been paid and private creditors have been forced to accept "voluntary" debt haircuts. Despite all this, Greece is in even worse shape today than it was then. Its economy is shrinking, the debt ratio is rising and the country and its banks have been cut off from capital markets. There isn't even the slightest sign that the situation might improve. Something has gone very wrong with this rescue.

But none of the protagonists seem to have grasped this. They continue to negotiate as if things are business as usual, they let one "final ultimatum" after the other pass and they persistently fail to realize that their discussions have started to verge on the absurd. It would be a lot better to end this farce.

For weeks now, the Greek government has been negotiating with private creditors and the troika comprised of the IMF, European Union and European Central Bank (ECB) over a second bailout package. But it is already clear that this aid package will not save the country. It appears it will only delay a Greek insolvency -- and it will serve to create new hardships for the country's population...

If the country is to lastingly reduce its mountain of debt and, at some point, be able to borrow money on the capital markets again, then it needs a comprehensive debt haircut. In other words, it needs to go bankrupt....

Of course, things wouldn't stop there. The euro-zone states would also have to build a bigger firewall around the remaining crisis countries in order to prevent contagion. They would have to help some banks that get into trouble as a result of a debt cut. And they would have to provide Greece with a real opportunity to get back on its feet and start growing under its own steam -- in other words, a kind of Marshall Plan.

All this would be very expensive, and German taxpayers would also be forced to do what they have feared from Day One -- which is to pay for Greece. But this solution has two major advantages. The payments would be limited, and they would actually help Greece.

And unlike everything that has been negotiated up until now, the solution would also be worthy of being called a rescue package.